Two Defense Contractors to Pay $8 Million to Settle False Claims Act Allegations

March 30, 2016

Tennessee-based Kilgore Flares Company and New York-based ESM Group have agreed to pay a total of $8 million to resolve allegations that they violated the False Claims Act by selling or conspiring to sell defective infrared flares to the U.S. Army and that ESM knowingly evaded antidumping duties.

The United States alleged that from July 2003 through May 2005 ESM knowingly misrepresented the content of ultrafine magnesium powder imported from China in order to avoid paying antidumping duties owed on the imported powder. At the time, ultrafine magnesium powder from China was subject to a 305 percent antidumping duty. The government also alleged that from March 2005 through August 2006 Kilgore used the illegally imported Chinese magnesium powder purchased from ESM in the countermeasure flares it sold to the U.S Army. Using the illegally imported powder violated multiple provisions of Kilgore’s contracts with the Army, namely that the contract prohibited use of magnesium powder from foreign countries (except Canada) and that the Chinese magnesium powder did not meet the engineering specifications required by the contracts. To resolve these allegations, Kilgore and ESM agreed to pay $6 million and $2 million, respectively.

Prior to these civil settlements, five former ESM employees and agents, including ESM’s former president Charles Wright and father and son pair Gregory and Justin Magness, pleaded guilty to criminal charges related to the antidumping duty evasion scheme. In total, the criminal defendants were ordered to pay over $14 million in restitution.

The settlement with ESM resolved a lawsuit filed under the qui tam provisions of the False Claims Act by Reade Manufacturing Company, a domestic manufacturer of magnesium powder. The qui tam provisions permit private parties to sue, on behalf of the United States, those who falsely claim government funds or avoid paying funds owed to the government . The False Claims Act also allows the whistleblower to receive a portion of any funds recovered through the lawsuit. In this case, Reade Manufacturing received $400,000 from the settlement with ESM.

“The Department of Justice is committed to ensuring that contractors do not cut corners in manufacturing critical items sold to the U.S. military,” said Principal Deputy Assistant Attorney General Benjamin C. Mizer, head of the Justice Department’s Civil Division. “These settlements also show that the department will aggressively pursue those who avoid paying duties to gain an unfair business advantage over competitors who abide by the rules.”

“The components of U.S. military equipment are held to rigorous standards to ensure our military superiority and the safety of our warfighters,” said Special Agent in Charge James Spero of Homeland Security Investigations (HSI) Buffalo. “When short cuts are taken, lives are put at risk. This settlement ensures that the companies involved are held responsible for their actions and further emphasizes HSI’s commitment to ensuring that the sale and distribution of products used by our military is done with integrity.”

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